2.7
Economic Evaluation
This section describes the equations used for the economic evaluations in the project.
2.7.1 Payback Period
The payback period method is one of the simplest ways to evaluate an investment. The
payback period is the investment divided by the annual cost savings according to:
(9)
where
is the payback period, is the total investment cost and is the annual cost savings
due to the investment. Since the method is simple, it has some major drawbacks. The method
does not include anything that happens after the payback period, such as future costs or
benefits from the investment. It also ignores the time value of money; it only takes the current
value of the investment and cost savings into account. Therefore this method should only be
used as a way to evaluate the risk of an investment. [11]
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